The Day After Tomorrow: A Different Kind of Trade

Submitted by Otaviano Canuto
On Wed, 05/04/2011

co-authors: Marcelo Giugale

Over the past three decades, global trade grew almost twice as fast as global gross domestic product (GDP). The massive process of commercial integration was made possible by technological revolutions in transport (like containerized shipping) and communications technologies, and by a dramatic decline in import tariffs. This allowed many developing countries to implement export-led growth strategies that lifted hundreds of millions of people out of poverty. Some succeeded in sought-after manufacture markets and, more recently, even in services.

But the 2008–09 crisis showed the volatile side of integration. In two years, the volume of world trade fell by a third. International production networks carried along country-to-country contagion at staggering speed. Naturally, calls for government intervention have multiplied. The question is: what kind of intervention will that be? The probability of going back to pre-globalization, import-substituting industrial policy is not high, but is not negligible either—concern for unemployment may still trigger protectionism, especially amongst rich nations.

More likely, public policy will, in most countries, take an “enlightened path” that uses the power of the state to make markets work, as we argue in our book, The Day After Tomorrow: A Handbook on the Future of Economic Policy in the Developing World[1], World Bank Publications, Washington D.C. The “enlightened path,” in the next two to five years, will still involve the traditional prescriptions of sound macroeconomic fundamentals, qualified human capital, and efficient institutions. It will also involve renewed efforts at the less glamorous art of facilitating trade. Trade facilitation includes reducing the cost of moving goods (more competition in logistics markets, faster border agencies); helping exporters survive (stable finance, maintenance of standards, certifications, and licenses); linking export-processing zones with local clusters (more flexible zone rules); and enhancing the practical value of export promotion (dissemination of best practices and commercial intelligence).

Strategically, the “enlightened path” --call it “export-led growth 2.0” if you want-- will be defined by two new, powerful trends in global trade. First, South-South integration. With the United States, the Eurozone, and Japan forced to “rebalance” their saving-consumption mix in favor of the former, commerce among developing countries will play a much larger role. More advanced emerging markets will account for a larger share of the demand for lower-income countries’ exports. A multipolar pattern of global growth will emerge. In fact, the crisis has only accelerated a decline in the relative importance of rich-country demand that had started almost two decades before. This does not mean that South-South trade will be easy. Consumers in developing countries care more about price than quality or variety. Import tariffs are higher, by several multiples, compared to the Organisation for Economic Cooperation and Development (OECD) countries, and investment climates are worse.

Second, the new trade strategies will put a higher premium on diversification, not only of partners but also of products, as an insurance against volatility. Expect more trade agreements, and more mutual surveillance among developing countries. And expect innovation to be the new code word for trade success. The quest for new brands and niches will dominate the second generation of internal reforms --from research and development incentives to tertiary education that can make export-led growth models viable.

Will exchange rate policy be an effective, even common, instrument in the new multipolar, diversification-driven trade framework? Unlikely. The proliferation of production chains, where import content is critical for exports, will not sit well with artificially high exchange rates. For most countries, the cost of managed undervaluation in terms of reserve accumulation and inflationary pressures will prove unbearable. And the uncertainty associated with large exchange rate misalignments will slow export-oriented investments.

In sum, the crisis will not usher in the end of globalization. On the contrary, there will be more integration. But this time, it will take place mostly in the developing world, and will be led by those countries that have more ideas, not necessarily more resources.

*Otaviano Canuto is the World Bank’s Vice President for Poverty Reduction and Economic Management, and Marcelo Giugale is the Sector Director of Poverty Reduction and Economic Management for the Africa Region. They are both the coeditors of The Day After Tomorrow: A Handbook on the Future of Economic Policy in the Developing World.